Thank you for listening! Find a transcript of this episode below.
A subject that's been coming up a lot recently in coaching calls is stock options, and many of you have them and you may not realize it, or you do know they exist, but you're trying to figure out what you should do with stock options. And stock options are actually a pretty complicated subject. They're one of the most complicated financial instruments even when the divorce process isn't involved. And when you add divorce on top of it, trying to decide what you do with the stock option, whether you keep them, split them, how do you negotiate for them? They're tough.
I remember when I was much younger, I still have on my bookshelf an old book about stock options and it is one of the hardest to read books that I've ever purchased because they are a very complicated subject. But because it's the podcast, I'm going to, of course, simplify it for you and try and make it as easy as possible. And I want to give you an overview of stock options, what to think about with them in the divorce context.
Some of you may have them and not realize you have them. Some of you might not have them at all, and which point this episode might just be some general education on stock options, or maybe you know someone who's a friend who has them. But I'm going to go through kind of what they are, how they work, why they're important. They're one of those assets in divorce that if you have them, they can be very, very valuable. In some cases, I've had cases were stock options are the most valuable asset in the divorce and other times, stock options can be worthless. They are a very fascinating subject in that regard.
But let's start with the basics. And by the way, in my book, Divorce And Your Money, The No Nonsense Guide, I have a short chapter on stock options that explains what these are and why you need to be thinking about them. What stock options are, I call them stock options or employee stock options, it's a form of compensation and basically, it gives you a right but not an obligation to buy a certain number of shares in a company, in the company that you work for usually, at a specified price.
Now, what does all of that mean? It basically means that stock options give an employee the benefit or give employees the opportunity or the ability to benefit when a company goes up in value. Stock options also give an incentive for an employee to stick around at a company rather than leave. And the way it does that is it says, "Hey, you get a certain percentage or you can buy shares of stock at a discounted," I won't call it a discounted price, but you can get stock in this company and appreciate in its growth.
And if you are or your spouse is an executive in a company, but don't have to be an executive, can be at many different levels, but most of my clients are generally executives or pretty high up in a company when they think about options. You can have these stock options there and it says you're a part owner in a company, basically. There's some specific mechanics to it that make them a little bit more complicated than just being a normal owner, but they basically give you ownership.
And if you're at a public company, in a company will usually have thousands of employees, it has a stock market ticker. You can look up the price for it. I know lots of people who have stock options at public companies. They're a very common form of compensation. Actually, even when I was working at my very first job out of college, I was working at JP Morgan and they gave stock options basically to everyone as a form of compensation and to keep you at the company longer. You get a big bonus of stock options.
And then if you work at a private company, and so this is the private company side is actually pretty complicated when it comes to stock options, but if you work at a private company like a tech startup. At the time of this recording, I'll give you an example of a big name. Uber is a tech startup that you've all heard of. Well, most of their employees have lots and lots of stock options that could be very, very valuable. They are a sign of ownership in the company and it's a big form of compensation for the company.
And so at the end of the year, or at a certain time during the year, a company might say, "We're gonna give you part of your bonus in cash and part of your bonus in stock," and those stock are usually in the form of options. Now, the reason options are tricky is because of something called vesting. I'm not going to get into all the mechanics of vesting because it's just so complicated and it really varies on a case by case basis. But just because you have these stock options doesn't mean you have ownership in the company yet. As I said, they're still called options.
And because of this term vesting, it's basically just says that you don't own, you don't get a full value of your options just because you have them. You might get your options awarded to you the longer you stay at a company. So if you got $100 worth of stock options, well maybe only $10 have value today, but if you stay at the company for five years, you earn the rest of that money and you get the full value of those options.
So the point is that, I know this is difficult to grasp, but stock options are a piece of ownership in a company. They have a vesting schedule, they call it, but they vest and so you earn that ownership usually the longer you stay at that company over time. And if you leave the company before your stock has vested, that stock becomes useless.
That's not a point we're going to get into for the sake of this episode, but oftentimes in negotiations, when you're thinking about stock options and what you should do with them, if you or your spouse or whomever is going to leave the company with unvested stock, then that will become useless to you. Something very important to think about as well.
So whenever you have stock options, you're going to need to know that they exist and also you're going to need to know their vesting schedule. Now, that's just some basics on the stock options. Now, the real question is, what happens in a divorce context? The real thing to understand in a divorce context is the way you treat stock options in divorce varies substantially on one factor.
And that is, if your spouse is working for a private company, a company that's not listed on a stock market, whose shares don't trade every day, then the way you approach stock options in divorce is very different than if your spouse works for a public company. If your spouse works for a company like Bank of America, or Walgreens, or Best Buy or Walmart, or any number of big companies, there's also tons of publicly traded companies you may have never heard of before, but you can go online, you can look up their stock symbol, and you'll see a specific price for the share.
If your spouse works for a publicly traded company, then stock options are much, much easier to deal with. If your spouse works for a private company, then the stock, or you I should say, then the stock options are much more complicated in terms of how to split them in the considerations you should be thinking about as you try and figure out what to do with them.
Now, I was going to start with a public company example. So when I worked at JP Morgan, they gave stock options a lot. And basically, you can go online and you can type in, you can go to Yahoo Finance or Google Finance. You can type in "JP Morgan stock price" and you can look up the exact value of what each stock option is worth. And so if I had 10 ... So as of the time I record this, JP Morgan stock is worth about $100. Very easy. It's good for our math.
Let's just say they gave me a 10 shares of stock as part of my bonus. They actually give much, much more than that, but let's just say they gave 10 shares of stock as part of my bonus and options. And so I have 10 shares of stock at a stock price of $100, which means I have $1,000 worth of stock options. Well, if you are trying to figure out what to do with those stock options, that is a pretty easy thing to figure out because one of the biggest challenges with any asset is trying to figure out what it's worth.
Well, with a publicly traded stock, you know what the stock price is, you know how many shares of stock you have, and you just do some basic math and you come up with a value. In my case, I've got 10 shares of stock at about $100 a share. So I've got $1,000 of stock that I would have to split. Not much fancier than that. The only thing that's complicated is usually the math isn't that easy, but it's not much harder than that.
Where the complication comes is if your spouse works for a private company, and I've actually had this discussion on calls quite a bit, is the difference between a private company and a public company. Just so that you know, is private companies aren't listed on a stock exchange like the New York Stock Exchange, or the American Stock Exchange, or the Nasdaq or whatever. And so the value of the company isn't traded every day. And if you want to ... You can't just look up how much the company is worth.
A public company has a share price and you can buy and sell the stock every day, but the good thing about a public company is you can always look up what the market value is at any given time. With a private company, it might just be a few people who own it, might just be the employees who own it, or might just be an investment firm that owns it, and they won't necessarily tell you the exact value. And so when you're dealing with private company stock, the considerations get much, much more complicated.
The reason is you don't know how much that stock is worth. The challenge with private company stock is valuing it. Private company stock, I'm not going to get into all the mechanics of it because it's way beyond what we could do and talk about in an episode that's useful to you, but one thing to consider, one thing that's weird about private company stock is it has no value until someone gives it a value. Now what does that mean?
Well, you can have private company stock. You can have 10,000 shares of private company stock that's worth one penny a share. So in theory, it's not worth that much, but what happens is with private companies, they might raise money from investors, in which case that penny a share that I talked about could become worth, all of a sudden, $2 a share instead of a penny a share. And so what was almost worthless before is now worth millions of dollars.
Or if that company gets bought, or if that company does any number of different transactions, those stock options, while initially on paper aren't worth anything, could become very valuable in the future. Private company stock is very weird in that regard. And when we think about it in a divorce context, it's one of the areas that causes a ton of complication because of this very issue. I had to work with a lot of attorneys on it, a lot of clients directly, and educate you that private company stock is a very complex area and thing to deal with and you have to be careful with it.
Let's just go through quickly what the difference is between private and public company stock in a divorce context and how you think about what you should do with it and try and come up with the best decision for you. If you have a public company stock or the company's traded, you can look up its value, you know the value. The value is clear. There's no real reason to split the stock and go through the complicated splitting process for stock options. It's usually not worth it.
Best thing to do is the person who has the stock keeps it. The person who doesn't have the stock gets credit for it, and you give up a little bit more of another asset to make up the value. But that's it. When it comes to ... It's simple. You treat the stock like a car. If you really want part of a publicly traded stock or you really wanted to split it, here's what I always say.
You can open up an e-Trade account, or a TD Ameritrade account, or a Schwab account or whatever and in five minutes, purchase that publicly traded stock. It's a very easy thing to purchase and there's no reason to add thousands of dollars of fees and complication trying to split publicly traded stock most of the time, or stock options most of the time. It's just not worth the effort. There's so many simpler ways to deal with it than splitting it.
When you're dealing with a private company stock, that is a very tricky area because we don't know what the value is. And so in general, most of the time when we're dealing with private company stock, you split it in half or you split it in whatever proportion you're splitting the assets. The reason is private company stocks value can fluctuate so quickly, so instantaneously that if you don't take your half the value, you could end up losing out quite a bit.
And there's definitely a lot of complications around it because it depends on how big the private company is and the mechanics of splitting the stock, et cetera, et cetera, but what the current value is of that stock. But many times, I see cases where the spouse who has stock options says, "Oh, these are worthless. We don't need to worry about the stock options. Let's just move on." And in theory, at the time they say that, they actually might be true, but the reason they have stock options is because they could have a lot of value later.
And so at this private company, it's a tech startup or whatever. I had a case like this this year where the person works at a tech company, the stock options aren't worth very much, but all of a sudden, a big investment firm in the middle of the divorce process, thankfully, comes in and says, "Hey, we're going to buy this company." And all of a sudden, those stock options which were worth a few thousand dollars at best, became worth hundreds and hundreds of thousands of dollars overnight and became a much bigger issue.
It sounds weird because it is, but that's also how stock options work, is oftentimes their value can fluctuate substantially, particularly with private companies where they're fast growth, valuing them as very, very difficult. And so the easiest way to get around that is by just splitting them evenly and therefore no one can lose out.
I'll give you another example, is if you are, say your spouse have stock options and the stock options are currently worth $1,000. Well you say, "Oh, I'm going to skip the stock options. I'm just going to get my share in the house and move on." Well, what if two years from now those stock options are worth a million dollars? How are you gonna feel about that? It's such a weird example, but that's how stock options can work.
Now also on the opposite side with stock options, this is something to consider, is they can also lose value. So you could say, "Actually, I want my share of those stock options," and it turns out the company goes bankrupt and they're worth nothing. So that's also a consideration as well. The point is there's a lot to think about if you have stock options. And if you're in the divorce process, you need to make sure you know that they exist and you really need to think through all of the different scenarios that could happen with these stock options so you can figure out, well, what is the best course of action for you later down the line with the options?
There's a lot of creative solutions that you can come up with for this very complicated asset. I hope I gave you a basic overview. It's not an intuitive subject and it's tough to explain and tough to explain clearly, but give you a basic overview of stock options. And if you have them, it's definitely an area, whether you have them or your spouse has them or you think you have them, it's definitely an area where you need to raise a red flag, make sure everyone has clear information as to exactly how they work, and from there, there's a lot to be thought about in terms of the divorce process, in terms of stock options and what the best strategy is for handling them.
It's an area that most attorneys, actually, I know aren't super well equipped to handle. Some are. There are definitely a handful of great attorneys out there who are super financially savvy who know the ins and outs of stock options better than me, but the average attorney off the street, certainly not. And actually, even many financial advisors, even good ones, don't know how to handle stock options well. And there's only a handful of people who really have good expertise in the stock option world.
If I were actually going to ... I'm going to leave you with a nugget. I love to give you resources and things to check out. One area or one person who's very, very good with stock options is a certified financial planner, a CFP. If you or your spouse have stock options and you're thinking about what to do with them in divorce, of course you can call me.
But there's also local certified financial planners who can help you think about the calculations, walk you through all the ins and outs of stock options in your specific scenario, and help you figure out, what are the best courses of action given this highly complicated, highly unusual asset that actually, a lot more of you have and you don't even realize that you have it or maybe you have an inclination that you have it but haven't really given thought to it in the divorce process.
So you can get a CFP, certified financial planner, contact me, or make sure you have an attorney who is very savvy in terms of the ins and outs of stock options because they are one of the most complicated areas for you to think about.
Thank you for listening! Find a transcript of this episode below.
In this episode I want to discuss refinancing the house in the divorce process and some considerations that you need to be thinking about as part of this process. Now, whether you're the person who's going to be keeping my house or if you're the person giving it up, there's going to be some information in here that is going to be helpful for you. Another thing I just want to mention right off the bat is if you go to the store and you get the quick start guide, I have 9 or 10 episodes dedicated just to considerations regarding your house in divorce and there's a lot of great information in there. It's a whole section in the quickstart guide and if you haven't checked that out, definitely go and get it because only some of the episodes are here available wherever you listen to podcasts. But the vast majority of them with a lot of great information a part of the quickstart guide.
Now, what we're talking about in this episode is house refinancing. It's a very common topic that comes up on coaching calls almost every day. And what we're talking about is basically transferring the name of the house from one person to another but there is a mortgage involved. I'd say 9 out of 10 times you have a mortgage on a house, some people in their houses outright, but most of the time there's some sort of outstanding mortgage balance. And the question is how do you actually get that mortgage out of one person's name and onto another. And so the house could be in both of your names, both you and your spouse's name and you want to put it in just one person's name afterwards or it could be in one spouse's name and they want to transfer the home and the mortgage to the other spouses of name.
And the reason I want to talk about this topic is there's a lot of considerations and things you need to be thinking about today and implementing today to make sure that you're thinking about your future and you're thinking about the refinancing process properly because there's a lot of common knowledge that I share on pod or on the coaching calls that people don't really know and so I want to bring that up for all of you who are listening. I'm going to use some examples to clarify what is important in this process and to give you some nuggets to think about. So I'm going to use the example of a husband and wife couple and the husband or the house I should say, is in both of your names. Both the husband and the wife's name's on the house and guess what? Both the husband and the wife are on the mortgage.
Let's say you have some young kids and so it's going to be better you think for one of you to keep the house. We're going to use the stereotypical example of the mom staying at home with the kids or at least wanting to keep the house with the kids and having primary custody. So the husband in this just sake of example, I deal with everything in between, but for the sake of this example we're going to assume the husband wants to transfer the house and the mortgage to the wife's name and how that process is supposed to happen. And actually it's not a simple process. I'm going to get into some further descriptions on the wife or the mom in this case because it's going to be relevant in terms of whether or not you can refinance.
What you do when you refinance a mortgage is you're basically getting a new loan out, paying off the old loan and then just the new loan remains in place. So I'm going to give you an example. I'll use some very simple math, keep it easy. Let's say you have $100,000 of a mortgage on your house and both of your names, well we're going to give it out. In this example we're giving the mortgage to the wife and so as the wife or soon to be ex wife and soon to be custodian with the kids, that person has to get a new mortgage and they are going to have to refinance and pay off the old mortgage and get the new one. And so with the new one, they are probably going to have to get a mortgage for about $105,000.
What I mean is there's going to be some fees and some expenses associated with getting the mortgage, but you have $100,000 outstanding. The wife is going to have to go to a mortgage lender and see if she can qualify and get a mortgage for $105,000. They'll take out $5,000 in fees and then what you're going to do is you're going to repay the mortgage with both your names on it. So it's going to be a zero balance. And then the wife is just going to have a mortgage in her name outstanding. Now, there's a lot to cover in that relatively straightforward example. So I want to dig into some details and some things that you should be thinking about if this is going to be an element of your divorce process.
First and most importantly, and this is where almost everyone goes wrong that I talk to and doesn't think about, is if you're planning on refinancing a mortgage and just putting one person's name on that mortgage, that person needs to be able to qualify mortgage on their own. It means that person needs to have enough credit and enough income to qualify and fully pay off that new mortgage. Many people do not have this point. If you are trying to take the house yourself, you're going to need to refinance and get a mortgage in your name or if you're trying to give it to your spouse, you're going need to refinance and get a mortgage in your name. Often times the spouse who wants the house will not qualify for it because you not only need good credit, but also you will need income to prove that you can repay those funds.
So if you are a stay at home parent and have not had income and your only income is going to be potentially some form of spousal support, you may not qualify for refinancing the house or if your spouse has bad credit and they're about to take over the house, they may not qualify to refinance the mortgage in their name only. And if you are a bank you want to be certain that the person who's going to be taking this refinancing loan out can actually pay for it. Look at the time, well, you are married and both people's names are on the house. If you stop paying, the bank has the option and will not just the option, they will pursue both of you aggressively until they get their money back and there's two people that they can pursue and two people's assets and income and everything else that they can over.
Now, if you're making it just one person, well the risk to the bank is much higher because now there's only one person whose assets and income they can go over and try and take and so they're going to want to make sure that if that one person is only on the hook that that one person can repay for things. But if you don't, if you're a stay at home parent and you don't necessarily have a clear source of income for the foreseeable future of your refinancing time, then it is very likely that you won't be able to refinance the home and therefore won't be able to take your spouse's name off the home and therefore either going to have to sell the home or figure out another arrangement. There's a lot of risks to that and a lot of things you need to think about and conversely if you're on the other side of it.
Let's talk about the other side because I work with a wide variety of people in a wide variety of situations. Let's say you are the person who wants to take their name off the house and so your spouse is the one who's going to have to qualify for the mortgage. Well, there are some issues with that because if your spouse is unable to qualify for a house refinancing, you are putting yourself in a world of risk and potential liability if you leave your name on the house and the mortgage. And so here's what I'm getting at. Let's just say you come up with some great divorce settlement, you think you're pretty good and as part of the divorce settlement you write in my now ex spouse is going to be responsible for any future mortgage payments on the house, but we're not going to refinance it we'll leave it as is and keep both of our names on it.
Well, let's just say three years down the line something happens and your spouse misses a mortgage payment and then maybe starts missing two mortgage payments or three. All of a sudden you're going to be getting calls about mortgage payments being behind, your credit's going to fall substantially and you're going to put yourself into a lot of risk and liability for this outstanding mortgage that you should have refinanced or at least gotten rid of one way or another down the line later. And so there are some things for you to think about. I almost never encourage people to leave their names on the house if they're not living in it after divorce because it just presents too much risk down the line. But oftentimes you have to make sure your spouse can qualify for a that refinancing.
Now, I've talked a lot about some of the circumstances and situations and considerations as you think about refinancing your mortgage in divorce. The good news is now that you have a little bit of a handle on it, there's an easy solution to this whole thing that all of you, if this is going to be a question in your divorce, either you or your soon to be ex spouse needs to do this sooner over later. It's not hard. You contact a mortgage broker or a mortgage lender and you see if you will qualify for refinancing or you could say prequalify for a refinancing. You can't actually do this process in most cases until the divorce is signed. But you can find out if this process is actually feasible for you before that. And what do I mean? You do this, you contact a loan company. I don't endorse this company. I don't know much about them, but they advertise a lot so Quicken Loans.
Quicken Loans I see their ads all the time. You can contact Quicken Loans and say, "Hey, here's the situation. I'm about to get divorced. I want to make sure I can qualify to refinance for refinance my mortgage and put the house in my name as part of this process." They do this thousands of times a day with tens of thousands of people, they're very used to this conversation. You can go to them and they'll ask you for your information, your income, etc. And they'll say, "Hey, you can be approved up to X amount of mortgage." And so you can take that amount to them and they might say, "All is good. Yeah, I think this will work out for you. You're looking good." Or they'll say, "Actually, you don't meet the qualifications at all for what we require and this probably won't work out for you." And you have to go back to the drawing board or you go to the company that originally did your mortgage and contact them.
Whoever you want to contact, it takes an hour or two or whatever, but you apply and just say it's for preapproval to see if you can do this thing. You don't have to take it, there's usually no fee just to preapprove yourself. It's an hour or two of your time, very straightforward and if you meet the information they'll send you a document that says, "Yeah, you prequalify for this refinancing. Here's all the terms, here's the fees, everything laid out." It's usually on a couple pages and you're good to go and you know what your options are, whether or not you pursue it or not. Or if you go and you find out and you say, "Hey sorry, given the house, given your credit, given your income, given whatever their issue may be, you don't qualify for this refinancing." Well now you know your options in terms of the divorce process or if it's your spouse who's the one who needs to go through this process.
I would say, "Hey spouse, look, I'm happy to give you the house, but you need to just make sure that we can actually refinance it. Just go call this company or call one of these three companies to make sure that this process is doable." And so there are things to consider and you just go and get an answer. If the answer is yeah, you could refinance this mortgage, then you know the answer. If the answer is no, you can't refinance this mortgage, then you know that answer too and you can make an appropriate decision in terms of all of the other issues in your divorce process and really come up with a divorce settlement. The worst thing that I see, and I see this happen many times down the line, is when you have an idea in your head or you're deep in the negotiating process and you book a coaching call or whatever else and you say, "Hey, here's what we're going to do. Here's what we're thinking about. How does this sound?"
And I'll say, "Hey, this whole transferring the house and refinancing isn't as simple as it sounds. Have you been pre qualified yet? Have you contacted a mortgage broker?" And you'll say, "No." We'll say, "Hey, why don't you just take the next two days, I'm going to give you some homework, go contact a mortgage lender and see if this is actually feasible." And many times you are very surprised with the answer or what is required and you have to really adjust what you're thinking about. Now, it's not all bad news either. Maybe you find out that everything's on target and you're okay and you have the definitive answer and you're good. But the sooner that you can figure out and contact someone about a refinancing the better. The other thing I want to just toss out there is there are also other creative solutions when it comes to refinancing a house.
I've worked with some people where we can partially pay down the mortgage with retirement funds as part of this process and refinance a chunk of the mortgage and if you do a chunk of it, you're in good shape and can refinance or can come up with a creative solution. It really just depends on individual circumstances. One of the reasons I do this podcast is this stuff is complicated and oftentimes there's many different ways at looking at things and that's some of the things we get on coaching calls or with the people I work with on a longer term. But you could come up with some pretty interesting solutions down the line for things that you might not have thought about when it comes to the mortgage. And so the other thing when it comes to a refinancing, and as I said you should really contact some mortgage firms or some banks that provide mortgages and explain the situation.
I promise you all of them have dealt with hundreds or thousands of divorces each year and are very familiar with the circumstances involved in the moving part of the process. There's nothing scary about it, it's just taking the time to do it. But you could be in a position where, well, let's just say using $100,000 mortgage that we were talking about before, they could say, "Hey, given your part time work and your income and whatever else, maybe you can only refinance $40,000 of that mortgage." Well maybe that's sufficient because if you have $60,000 on other assets, you might be able to pay off with using a retirement plan or something else. There are ways to structure it so it's tax advantageous if you know the laws and work with an accountant or work with me or whatever else, the ways to structure a creative solution so that, all right, well we're going to take $60,000 from this retirement account.
We're going to refinance for $40,000 and that way we're going to get rid of this mortgage, you're only going to have a $40,000 mortgage outstanding. Everyone's going to be happy, no weird liability, etc. We've done that time to time with people as well because that's just the solution that makes sense. It's really about and this podcast is about and what I'm here to help you with is understanding your options, understanding the complexity involved, understanding that some of these decisions even though conceptually they're pretty basic, refinancing a mortgage actually in practice, they have a lot more complications to them that you don't often think about. And I want you to be informed and really understand, hey, I need to think about this decision further and really make sure that whatever my spouse and I decide is really the appropriate financial decision and feasible financial decision for both of us and puts us in the best position possible.
And making sure that you're not forgetting anything that is a very important as part of this process. And refinancing the house in theory very simple, in practice very complicated. And it's been coming up every week on calls and so I want to make sure you're all informed as to how much there is to such a very, in theory, simple decision.